Bank Bailouts: Goldman's Debt to Society

Tuesday, 04 May 2010 04:54

It is painful to see the ongoing coverage of the bank bailouts and the extent to which the government is being reimbursed. It is true that the banks have repaid the vast majority of the money that was lent. However, this is almost irrelevant to anything.

At the time the government made money available to the banks through TARP and even more so through the Fed, liquidity carried an enormous premium. The major banks charged each other 5 percent interest on 90 day loans because they did not have confidence in their ability to survive.

In this environment, the government stepped in and providing banks with huge amounts of money (we don't know exactly who got how much because the Fed refuses to tell us what it did with our money), at a cost far below what they would have been forced to pay in private markets. The banks could lend this money at enormous premiums or use it to just buy government bonds and pocket the difference in interest rates. As a result, most banks have been able to get back on their feet.

As a bookkeeping matter we can say that the government "profited" from these deals in the sense that it got interest on its loans. (It also received warrants from banks that it sold at a profit.) However, as a practical matter, these profits no more benefit the government's accounts than if the Federal Reserve Board just printed the same amount of money and handed it to the Treasury by purchasing government bonds. Unfortunately, few reporters covering the economy and the bailout understand this point, so they end up writing pieces that imply the country was somehow benefited by the fact that the banks repaid their loans with interest.

Great points, but what about Maiden Lane X? That's an even easier point to get across - paying 100 cents/dollar for known trash.

It's like the Fed offering to pay peak bubble price for my house now (I bought pre-bubble, but that's besides the point). Why can't I get that deal? Should I file for status as a financial holding company and then stop paying my mortgage?

+0

Banks and the Fedwritten by skeptonomist,
May 04, 2010 10:26

The Fed still holds over a $trillion in mortgage-backed securities. Banks would not be in such good shape if all that were dumped.

+0

...written by cas127,
May 04, 2010 10:27

Plenty of people get it - you are obsessing too much on the clearly dying MSM that is now mainly talking to itself.

If people didn't understand the essential BS the MSM/government is handing out (Whitacre's commercials, the Admin's repayment happy talk, etc.), then there wouldn't be at large screaming about Admin/GM shell games and the monster of potential hyperinflation (due to the Fed's additional printing of $1 trillion to prop up the "financial system" - which mostly means the NY-DC power nexus).

The clearest manifestation of this public awareness is the rise of the heavily maligned (perhaps even by you too) Tea Parties.

+0

...written by ellidc,
May 04, 2010 12:43

That might be roughly true, but there is likely return to the government that is the result of the banks extracting wealth from the economy or maybe even adding a little value. It was not all additional borrowing or recycled tax dollars as it would have been if the fed had just monetized the debt. Also the comparison ignores any multiplier effect on the economy by routing the money through the banks. In some ways touting the profits from the fed's actions is just a way of cheering that the money successfully made some kind of round trip through the economy.

+0

Tax their profitswritten by bakho,
May 04, 2010 1:07

This is why we should be taxing their profits. Any bonus over $100,000 should be taxed at the 50% rate minimum.

+0

...written by Ron Alley,
May 04, 2010 7:21

Perhaps the worst effect of the Fed's action of providing virtually interest free loans to banks has been to drive down the interest rates banks pay on deposits. The same holds for money market funds. Just look at the interest rate you now earn on bank deposits or on any cash held in your 401K.

Chapter 2 will occur when the Fed brings its funds rate back to normal levels. That will result in higher interest rates on mortgages and higher interest rates on bonds. If you own a bond fund in your 401K look for its value to drop by 15% over the next 12 to 18 months.

+1

...written by karen,
May 05, 2010 6:06

Although I trust your analysis completely, I'm finding the point is hard to grasp.